One of the simplest (no, not the easiest) ways to guarantee your financial success is to put away MONEY for your savings/ investment target each month before you spend a rupee! This is known as paying yourself first.
When I was younger and had a head full of foolish ideas and black hair I used to think that people had to do amazing complex hoops in order to “make it” financially. But now I know that as long as YOU follow this principle of saving first, financial success usually follows automatically. I have no clue why we (Indians surely) love complexity when simple solutions are available.
What Is Paying Yourself First?
In order to pay yourself first, you first have to find out how much you can save/ invest every month. Your goals for your life depend on this amount. If you cannot put energy into your goals, you are not serious about your goals. Remember money is just a form of energy! Once you do that, all you have to do is set up an automatic investment plan a.k.a SIP – a superior version is the TOP UP / STEP UP to suck that amount out of your savings account and into your investment account. This money transfer is done before you spend a rupee on any current need. The whole point is that. You start to live on an amount that is available for CURRENT consumption. AFTER ALLOCATING MONEY FOR your goals. You set this up to happen early – as soon as your salary got credited – and BEFORE you got time to spend it – or even looked at it! This way, you have a much better chance of putting that money away and keeping it away – out of YOUR OWN clutches.
Why Does It Work?
The SIMPLE and only reason it works is because we are humans and we do not think about the money (or things) that we do not see. We are also a victim of our habits – good or bad habits. Like brushing your teeth or smoking. Sure once you set this up, you can still write to the asset management company, revoke the instruction, reverse the money and spend the money. Chances are that you will NOT. But you won’t because it’s a hassle. Remember all products have a ‘money back guarantee offer’ – all sales people know that it never gets exercised. This ‘hassle’ is being put to a good use in this case. One case where inertia is good for you. Tell MOM – how in this case laziness is HELPING you !!
Why Doesn’t Everyone Do It?
People don’t sign up for a SIP because they do not know the advantages of doing so. Mr. Cyrus Mistry or Mr. Kumaramangalam Birla do not tell all all their employees (at the time of joining) that they should sign up for an investing program. Also people do not pay themselves first because they think they can hit their goals by saving (they do not even know the difference between investing and saving) what’s left after their monthly spending. The problem is, based on my experience, our spending increases as our income goes up. That means it becomes hard or even impossible to save EVEN if our income goes up. What’s been your personal experience? Please do share it.
Few people are willing to give up IMMEDIATE gratification (30 seconds on the lips and stays 30 years on the hips – a sugar laden sweet!!) in exchange for a income secure future. It’s sad but true. The shame of course is, you really don’t have to give up anything important in order to make this work. And if you do not do this, clearly, your stated goals are just dreams – if you do not put energy into it, it will not happen!!
Out of sight, out of mind. Goals without energy is just a joke. I am yet to see any SIP investor (who has stayed the course of at least 5-7 years ever complain about what they were giving up by paying themselves first!! Quite the opposite, most people tell me how happy they are implementing such a great, sexy, super idea!! Simple is it right? Well it is not EASY for all people – many cannot do it!!
What Happens If You Can’t Keep On Track?
Of course, life happens, friends happen, events happen and it’s sometimes not possible to stick to our financial plans. If your income changes dramatically, or you are given a pink slip, or your parent has an emergency, or, or…..you may not be able to keep up with your monthly (Systematic and Rising) investment plans. That’s OK. If you find yourself in a situation like that, and you miss your monthly “pay yourself first” plan for a month or two, don’t kill yourself. Re-adjust your spending level. Or save 11 months in a year – missing one month is better than shutting down the plan and brooding about life.
You may have to cut spending (travel, eating out, home rent…these are the normal killers) and you may have to reduce the amount of SIP THAT you do each month. No worries. No matter how much you reduce your monthly SIP, make sure you re-implement this as soon as you can. It IS a fantastic habit and the behavior is much more important than the amount. Over time, you will you will realize that this will be a great story to tell to tell your children and their children…!!
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